Sunday, March 22, 2009

Is Edward Liddy *our* fox now?

A timely reminder from Salon's Andrew Leonard that AIG is, in a certain sense, in "good hands":
According to at least one critic, Santa Fe attorney David Berardinelli, the author of "From Good Hands to Boxing Gloves," Allstate boosted its profits during the 1990s and early 2000s via a calculated strategy of getting tough on policy holders for the benefit of shareholders. Specifically, Allstate made it for difficult for policy holders to get what they were owed by playing several varieties of hardball -- including ramping up litigation against its own customers...

the Sarasota Herald-Tribune conducted is own extensive investigation last April, and came to a fairly compelling conclusion.

For more than a decade, Allstate Insurance Co. kept a secret from its auto policyholders -- a national strategy to force customers to accept reduced cash payouts or face years in court.

Thousands of pages of Allstate documents reviewed by the Herald-Tribune detail how the nation's second-largest insurer systematically cut payments to customers as a way to boost profits.

According to Berardinelli, Liddy "amassed a personal fortune of over $150 million in stock, options, and incentive bonuses" as a result of how the company restructured its claim system.

From the Herald-Tribune:

Allstate Chairman Ed Liddy touted the results at an international business conference in New York two years ago, showing Allstate had reduced its average check to a car accident victim by 20 percent, and held growth in other auto and home claims below industry averages.

Allstate and its property-casualty brethren have been similarly successful in reducing the real value of homeowners' insurance -- refusing to renew customers on the coasts, ramping up special deductibles for the worst risks, jacking up prices on the basis of new industry-favoring risk models -- and writing ever-more all-encompassing "anti-concurrent causation clauses" stipulating that if any excluded cause contributes to a loss, coverage is excluded notwithstanding "concurrent" covered causes.

Result for policyholders: according to J. Robert Hunter, former Texas insurance commissioner and director of insurance for the Consumer Federation of America, property/casualty (p/c) insurers now pay less than 60 cents in policyholder benefits for every dollar they take in, compared to over 70 cents twenty years ago. The results for insurers, also according to Hunter:
In 2004, with four hurricanes here in Florida, the Property/Casualty insurers set a record profit at $40.5 billion in net income. In 2005, even with Hurricanes Katrina, Wilma and the other hurricanes, they set another record profit, at $48.8 billion. Profits in 2006 were astonishing and totaled $67.6 billion. In 2007, profits continued at the excessive 2006 level We estimate that 2007 profits will be $65.0 billion, just short of the 2006 record but still remarkable. ..during the last five years [through 2007], the profits of insurers have totaled over $250 billion.
As Allstate's CEO, Liddy in 2006 led p/c insurers' rush to cut off coverage to homeowners in coastal areas. The Wall Street Journal's Liam Pleven reported in November 2006:
in many catastrophe-prone coastal areas, Allstate has stopped writing new homeowner policies and has dropped some existing customers altogether. Earlier this year, Allstate dropped 27,000 customers in coastal counties in New York. In Florida, it shed 120,000 customers, on top of 95,000 customers in 2005. And it's eliminating earthquake coverage for more than 359,000 homeowners nationwide.
That decision seems to have paid off. In its earnings report for the fourth quarter of 2008, Allstate boasts:
Our catastrophic risk management program includes reinsurance, policy changes that increased deductibles, and market share reductions in high risk coastal regions. These actions served us well. Allstate's analysis shows that our losses from Hurricanes Ike and Gustav would have been approximately twice the amount recorded without the catastrophe exposure management actions put into place beginning in 2005.
Liddy's overall strategy in 2005-2006 did have a downside, at least in the current short term. As Allstate pared back its homeowners exposure, it moved toward what was widely perceived by insurers at the time as the next pot of gold. Pleven again:
Behind the twist is a big strategic gamble for Allstate, one of the U.S.'s largest insurers, which has been chastened by recent hurricane losses. As he seeks to reduce the company's exposure to disaster losses, Mr. Liddy also wants his company to be a one-shop stop for middle-income baby boomers' financial planning, using an army of 14,000 sales agents to push an increased number of life policies, annuities and other products....

Allstate considers one segment of the market for financial products sold by its agents particularly alluring: Middle-income Americans with a household income of $35,000 to $200,000, which it says is more than half of U.S. households..

To build the business, Allstate is trying to boost the profile and training of its agents. Six years ago, few had licenses to sell securities, which are required for many annuity products. Now nearly half do, Mr. Liddy says.
Now Allstate is walking that push back. A goal for 2009, from the q4 '08 report:
Continued focus on improving returns and reducing Allstate Financial's concentration in spread based products, primarily fixed annuities and institutional markets products, will result in lower premiums and deposits and a smaller balance sheet.
On the other hand, even as it was making its annuities sales push in 2006, Allstate got out of the part of the business that's now most toxic for insurers, selling its variable annuity to Prudential Financial in March of that year. Conceived as a high-fee, heads-we-win-tails-you-win-less-that-you-should means of mining Americans' retirement savings, variable annuities that guarantee principal are killing some insurance companies. Prudential is now bleeding, while Allstate is in relatively solid financial shape.

Liddy may indeed be a fox guarding the henhouse. But, given taxpayers' 80% stake in AIG, is he our fox? Can he "claw back" the hens that AIG's past management let out -- on behalf of taxpayers?

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